Janet Rilling, Senior Portfolio Manager and Head of the Multi Sector Fixed Income-Plus Team at Wells Fargo Asset Management, talks seeking quality income in corporate bonds.
Laurie King: I’m Laurie King, and you are listening to On the Trading Desk®. Janet Rilling, Senior Portfolio Manager and Head of the Multi Sector Fixed Income-Plus team at Wells Fargo Asset Management, joins us to talk about seeking quality income in corporate bonds.
You saw Janet in our 2018 Midyear Investment Insights video Expand, Adjust, Adapt when she talked about adapting to changing monetary cycles in the U.S. and in Europe. Here’s a recap of her insights.
Janet Rilling: So, in the U.S. we would focus on corporate bond issuers that would do well in the later stages of an economic cycle—likely characteristics would be more defensive industries and ones that are less cyclical. In Europe, on the other hand, where we feel there’s more economic expansion and you’re earlier in the cycle, we’d look for those companies that benefit from the earlier part of the economic cycle—so, likely those industries that have a bit more of a cyclical bent to them.
Laurie: Janet explains industries and sectors that her team’s focusing on as these cycles play out.
Janet: In the U.S. we would look for companies in the technology space—companies in this space are providing services and products to their customers to help them with efficiencies and productivity gains. Another industry of interest might be the life insurance space where the policy premiums will now be able to be reinvested at higher rates given what’s happening to the yield curve. In Europe, a cyclical industry might be the automotive industry, diversified manufacturing, the retail space, and perhaps banking.
Laurie: Janet went on to explain that, with Europe being in an expansionary phase, what supports her investment ideas there is that she finds the consumer is more confident and more willing to spend on both small- and big-ticket items.
She then turned her insights toward tax reform in the U.S. and how that factors into her team’s expanding their ideas for opportunity. Janet shares her expectations.
Janet: So we’d expect with tax reform that, generally, consumers now have more money in their pocket, and businesses also are able to plan for a lower tax rate. It really feeds on some confidence, as well as some extra cash in people’s pockets. Because of that we’d expect a modest boost to GDP, which we think will then translate into revenue gains for corporate America.
And we think this gives us the ability to stay longer in the credit space. The default rate cycle will likely extend out further. Economic growth will support the balance sheet for the corporate issuers. And we think, ultimately, it’s a good time to find yield in the portfolio, and credit is a good place to do that.
Laurie: As the Multi Sector Fixed Income-Plus team listens to what’s being said from the boardrooms, commonly cited uses for tax savings are capital expenditures and mergers and acquisitions. And, if done prudently, that can help extend the economic cycle in the U.S. In regard to M&A, Janet places emphasis on prudence as they seek opportunity.
Janet: So, with M&A, we have to be careful because, at times, it is debt financed, and that can be negative for bond holders. But we’ll look for industries that are consolidating and that will really benefit from the consolidation in terms of cost-savings, market share gains, and really efficiencies of operations.
Laurie: And that’s because Janet believes that too big can be, well, too big.
Janet: At times I do think too big is too big. If a company gets very large and doesn’t have a good management team, they could run into integration issues if they’re growing by acquisition or just overall business management issues. So it’s a delicate balance to reap the benefits of scale, but not take on the risks of a large organization to manage.
Laurie: Yet, she believes industry insight and listening for nuance are important in finding quality income for investors.
Janet: Well, it starts with a very experienced researched team. Analysts that work on our portfolios have been following these companies for a very long time, as well as the industries. So they know the management teams, they know who’s credible. They know who’s historically had a good track record, and they can also really listen for those nuances in terms of change of strategy. That really gives us a first-mover advantage when we think a management team is going in a direction we just don’t agree with.
Laurie: A “first-mover advantage.” I’ll call that out as we end this episode. The idea that research helps our fixed-income teams to sometimes be early to opportunity and to be early out of risk. I’ll thank Janet Rilling for her insights. Learn more about the Multi Sector Fixed Income-Plus Team by visiting http://on.wf.com/6125DFtCD.
Until next time; I’m Laurie King, take care.